4 LEADING CHANGE FOR A SUCCESSFUL TRANSFORMATION Dr. George Marimuthu Senior Research Fellow Cluster of Development and Policy Research INTAN Bukit Kiara Buletin INTAN indd 3 28/10/ :04:01 AM

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6 LEADING CHANGE FOR A SUCCESSFUL TRANSFORMATION INTRODUCTION Transformation has been the new waking agenda that has left many organisations reeling to seek new ways of doing things in a highly performing stature that the public are demanding especially in unpredictable times. Transformation is not a choice but a necessity. Governments throughout the world are embarking on looking things differently and placing new programs and plans that change the underlying assumption of its existence. Transformation in the public service is an inevitable agenda when it is plagued by turbulent changes in a myriad of issues ranging from globalisation, economic crises, technology advances and the very increased public demand for improved public services which are growing intensely. Public service cannot orient its thinking on the traditional and conventional premises but must look beyond the shores to bring new and effective changes in the way it provides and render services. 5 LEADERSHIP Leaders and their teams must evolve new mind-sets and motivate new set of behaviours that behest the transformational agenda in the public service. Leadership is at the helm of realising and reaping the benefits of transformation. This is necessary for the entire organisation to adapt, grow and prepare for future challenges. Changes cannot be brought or forced through pure technical approaches such as restructuring and reengineering (McGuire, Palus, Pasmore and Rhodes (2009). It must be based on promulgating new kind of leadership that is able to reframe dilemmas, reinterpret options and reform operations and the ability to look far ahead. Leadership is always the important tenet that drives transformation by providing a compelling vision that helps to clarify the direction. Being forward-looking envisioning exciting possibilities and enlisting others in a shared view of the future is the attribute that most distinguishes leaders from non-leaders (Kouzes. and Posner (2009). Buletin INTAN indd 5 28/10/ :04:01 AM

7 Buletin INTAN Jilid 37, Bil. 1/2013 Leadership must inculcate new emerging skills to lead employees during the initial stage of transformation which is usually an important denominator for the early surge of transformation in organisation. Leaders must be able to understand the complexities of transformation process that needs the ability of leadership to be a role model; walk the talk and continuously communicate and engage with their employees. To lead change at the infant stage of transformation is riddled with suspiciousness, anger, frustration, despair, lack of trust and increase the sense of insecurity and finally leads to low motivation. This will finally pinnacle to the demise of productivity and job satisfaction. LEADING CHANGE 6 During these times of uncertainty, the single most imperative indicator to bring about trust and confidence in the transformation and its reaping benefits is LEADERSHIP. Leading change as espoused by John P. Kotter (Kotter, 1995; Kotter, 1996) will be the practised model in this article for explaining transformation and the need to change progressively in a systematic manner. The 8 steps or phases that every organisation experience during transformation is arranged accordingly: Step 1: Establishing a sense of urgency Step 2: Forming a Powerful Guiding Coalition Step 3: Creating a Vision Step 4: Communicating the Vision Step 5: Empowering others to act on the vision Step 6: Planning for and creating Short-Term Wins Step 7: Consolidating Improvements and Producing still more change Step 8: Institutionalising New Approaches Step 1: Establishing a Sense of Urgency Leaders who trot on this stage must be creating the sense of urgency that sparks the need for change and transformation. At this stage, leaders must look intensively and aggressively to the signs and hard facts of competitiveness, the quality of service decline, market share deterioration, financial performance and in the context of the public service, the fiscal and financial sustainability of the Buletin INTAN indd 6 28/10/ :04:01 AM

8 Leading Change for a Successful Transformation country, the quality of services rendered and the wellbeing of the people. There must be effort to identify and discuss crises, potential crises or major opportunities even threats and labour suits that can bring the organisation s image to shatters. Leaders need to engage and get the right sense of urgency moving and not fall to the false sense of urgency. Many organisations fail to identify the real sense of urgency and start to address issues that are not impacting the organisation s raison d etre- the very existence of the organisation or simply its survivability. Step 2: Forming a Powerful Coalition Transformation belongs to the entire personnel of an organisation. Moreover in the public sector, it must emanate in entirety and to be cascaded down to the lowest level personnel. Nevertheless, the imperative issue is that the renewal programs must be a maximum mass to ensure some worthwhile happens. There should be an effort to develop a shared commitment to accelerate the successful transformation and this emanates when there is a powerful coalition that is apparent in terms of title, information and expertise, reputations and relationships. People who pool their resources and work together are generally more powerful and more able to advance their interests, than those who do not (Spangler, 2003). 7 The powerful coalition should consist of senior management and members who are not part of the senior management which operates outside of the normal hierarchy. Senior leadership must develop and harness a shared assessment of the organisation and create a minimum level of trust and communication. This coalition group will render its role as change agents and vocal representation of the organisation. Step 3: Creating A Vision The objective of creating a vision is to clarify the direction in the change effort in which the organisation needs to move especially in the outset of the transformation stage. The coalition group should be staging and developing the picture of the future which must be compelling and appealing and it must be communicated effectively. The vision must be clearly articulated failing which it might be dissolved into a list of confusing and incompatible projects and programs and thus moving the transformation in the wrong direction. People need to know where all this Buletin INTAN indd 7 28/10/ :04:01 AM

9 Buletin INTAN Jilid 37, Bil. 1/2013 are leading. This creation and articulation of vision in months to come must be accompanied with strategies that explain and express the development towards achieving this vision. This stage must see the personnel understanding and showing interest and believe the practical achievements of this vision. Step 4: Communicating the Vision Efforts to communicate the vision is imperative at this early stage and is important that all personnel understands, believes, respects, trusts and together have the dedication and commitment to work together towards this vision. It is imperative that the leadership and the coalition group use every possible mechanism at its disposal to communicate this vision and its strategies with utmost clarity. 8 The guiding coalition group should emphasize in inculcating new behaviours that inspires and energise the personnel to work together for a common vision. People can radically transform their behaviour or beliefs in the face of the right kind of impetus. They are actually powerfully influenced by the surrounding, the immediate context and the personalities around them (Gladwell, 2000). As such, the powerful coalition group must ensure that the personnel must be convinced to help towards realising this vision and notifying them the need to make shortterm sacrifices and learn and ready to have or change to the desired behaviours. They usually will not make sacrifices even if they are unhappy with the status quo or their present situation unless they believe that the change will reap benefits for them. This need to be communicated in a sincere and responsible manner. Transfers, job losses and loss of power and authority will behest a mood of being betrayed and this might culminate into frustrations and fear. Communication plans must be design and implemented quickly to address this situation. Step 5: Empowering Others to Act on the Vision The momentum of a transformation will be successful when all the people in an organisation believes the benefits of the transformation and are willing to try new ideas, new initiatives and propel to provide leadership to realise the vision. Imagine employees want to subscribe to the vision, but they cannot do that immediately, then it is important to provide the employees with simple tools with Buletin INTAN indd 8 28/10/ :04:01 AM

10 Leading Change for a Successful Transformation which they can jump on the bandwagon with a feeling of shared ownership (Boer, 2012). The guiding coalition which is imperative to drive this transformation must be able to communicate the vision and the direction and this is paramount when it involves a big number of people. The only constraint at this juncture is that there tend to be obstacles that undermine the transformation effort. These obstacles could be in the form of organisational structures, systems, performance appraisals that are not appealing with the present new outfit and finally, the heads of department who decline to change. This could be due to fear, loss of authority with the new transformation, nonconfidence in delivering results but simply sees that the changing behaviours towards this transformation is not far-reaching and not achievable. Nevertheless, the credibility of this transformation must be appreciated and these bosses must be convinced fairly but also tactfully to walk the talk and provide the appropriate leadership needed. Step 6: Planning for and Creating Short-Term Wins 9 Successful and real transformation is a long journey but must be coveted with significant results in terms of productivity, performance and successful implementation of programs and initiatives that result in higher impact and outcomes. Personnel look out for these results to gauge and evaluate the effects of transformation and whether it bears fruits of victory. The rule of thumb is that if nothing convincing and compelling happens within 12 to 24 months, the momentum of transformation fizzles away void of the expected results. Without short term wins, too many employees give up or actively join the resistance (ITIL, 2005). As such, creating short-term wins and celebrating is a trustworthy evidence that the transformation is indeed something to believe, seen and appreciated. It is not passively hoping for a short-term wins. Successful transformation with short-term wins must results in achieving objectives, strategies and must be translated in promotions, rewards and recognitions to the deserved personnel. Buletin INTAN indd 9 28/10/ :04:01 AM

11 Buletin INTAN Jilid 37, Bil. 1/2013 Step 7: Consolidating Improvements and Producing Still More Change Successful transformation needs considerable and worthy results that can permeate through time. Any success should be consolidated to see bigger things in the future and this effort must be producing more change in the future. Revitalising the energy of transformation must be a continuous process and conviction. The infusion of new ideas to the way we work must be complemented with new people with new perspectives and endeavours. The passion must be growing with the leaders providing direction and energy. It simply means, keep up the momentum. According to Kennedy, Musselwhite and Plouffe (2012), this can include more experiential learning, peer coaching and leadership assessments, monthly conference calls to keep everyone informed of successes and results, and more employee and customer surveys. It pays to encourage leaders to share successes with reports. This facilitates better two-way communication, reinforces the learning, and supports desired new behaviors. 10 Finally, talent management must be revisited to ensure that the right people are at the right place with the right skill and competencies. This is imperative because this reality check ensures that the momentum of transformation is consistent with the long term vision and is implementable. Step 8: Institutionalising New Approaches The last part of this phase of the transformation program must be to ensure that the support processes in the organisation reinforce the new ways of doing things and work against the old ways of doing things. There must be continuity to articulate the benefits of the new status quo and work relentlessly to embed new habits throughout the organisation (Roberts, 2011). New approaches to institutionalise change must be permeated in the entirety in an organisation. Personnel must be convinced that transformation becomes the way we do things around here. New set of behaviours and beliefs must be deeply rooted in the organisation and becomes the social norms and shared values. As such, all this transpires to what we call as the domination and pervasiveness of a corporate culture in an organisation. They must believe that they were part of the successful transformation and feel proud of the achievements. They feel rewarded Buletin INTAN indd 10 28/10/ :04:01 AM

12 Leading Change for a Successful Transformation and recognised from this transformation. There are two important determinants for institutionalising a corporate culture; firstly, there is a conscious attempt to depict to the people how the new approaches, behaviours, attitude and beliefs have been a significance contributory factor to the transformation and its performance. Secondly, the future generation in the organisation must prevail and portray the required passion and conviction to carry on with the transformation. CONCLUSION Transformation is a long enduring process that needs the dedication and commitment of the entire personnel in an organisation. It must be appreciated, trusted and must be driven by passion to improve and deliver results convincingly to the customers and stakeholders. It is a promise that change is inevitable and new ways of doing things is the prime order now. It is also a promise to serve and deliver a product or service better enshrined in the principle of performance and wellbeing. Transformation at any organisation is a pace setting event that is witnessed by many stakeholders especially by an organisation s competitors. The clarion call to transform by the top leadership at the organisation must be adhered, appreciated and advocated and mostly implemented with passion and conviction - a conviction to bring results significantly to the organisation. 11 Buletin INTAN indd 11 28/10/ :04:01 AM

16 QUANTITIVE METHODS FOR JUDGEMENTAL DECISION MAKING INTRODUCTION Managers today are under intense pressure to make correct decisions. They often do so, without the luxury of time and resources, and have to rely on their judgement. However, judgement can be subject to biases that may be detrimental to the quality of decisions made. Quantitative methodology, be it statistics or operations research, has the potential to play a major role in planning and decision making, whether in the private sector or public organisations. However, studies in the late eighties by Han (1986) and Jantan and Ng (1990) found that the use of such methodology in Malaysia is low. The low usage has been attributed to reasons of lack of expertise, the theory-practice gap, lack of support from top management and the organisation culture, teaching and training in institutions of higher learning. Despite these, there are some success stories in the application of these techniques. Samik (1987) has shown that management science techniques can be successfully applied to deal with problems of resource allocation, scheduling and forecasting in rural planning in Malaysia. Similarly, Ramji (1987) has demonstrated the applicability of such techniques in India; whereas Ang (1987) found that the majority of quantitative techniques usage lies in strategic planning and control. 15 As evident from the above, the areas where quantitative methods can contribute most towards organisational excellence is in the area of planning and decision making. The two roles that these techniques play in enhancing decision making are: The role in reducing uncertainty, and The role in reducing complexity. We will explore the decision making process and related issues to explore opportunities for the greater use of quantitative techniques in enhancing the quality of decision making. Buletin INTAN indd 15 28/10/ :04:01 AM

17 Buletin INTAN Jilid 37, Bil.1/2013 THE DECISION MAKING MODEL The quality of a decision is judged by how good the decision is and therefore implicit in it, some criteria on which to evaluate the optimality of the decision made. This then calls for a prescriptive, as opposed to descriptive model to describe the decision making model. A typical prescriptive model of decision making can be described by the following six steps: Define the problem Identify the criteria Weight the criteria Generate the alternatives Rate each alternative on each criterion Compute the optimal decision The Descriptive and Prescriptive Models of Decision Making 16 The above prescriptive model rests on the assumption of rationality, requiring the decision maker to undertake the steps in a rational manner. However, the pioneering work of Simon (1957) and Simon and March (1958) argued for a bounded rationality in acknowledging the information limitations faced by decision makers when making decisions. Limitations in time and costs reduce the quantity and more importantly the quality of available information in defining the problem, the relevant criteria and so on. Further, the limits on intelligence and perceptions constrain the interpretation of the available information, thus hindering the ability of the decision maker to accurately calculate the optimal choice (Bazerman, 1998). These limitations force the decision maker to deviate from the rational model and instead seek a compromise solution (March and Simons, 1958). The above has described the prescriptive model of decision making vis-a-vis how a decision should be made. However, given the large number of decisions that managers have to make on a daily basis, such a model may not be viable for all as evident by the work of Mintzberg (1975). Another major area in the field of decision making is the study of the descriptive model of decision making. Descriptive models reflect how decisions are actually made as opposed to how Buletin INTAN indd 16 28/10/ :04:01 AM

18 Quantitative Methods for Judgemental Decision Making decisions should be made in the normative approach. In arguing for the role of quantitative techniques, one has to look at the descriptive approach, and identify avenues where statistics and management sciences can help reduce decision making deviations from the prescriptive approach. Biases in Judgemental Decision Making Mintzberg (1975) found that in making decisions, managers tend to rely on their intuitive judgement. The pioneering works of Tversky and Kahneman (1974) and subsequent researchers, have shed tremendous insight as to how judgements may be biased. They have argued that decision makers typically use simplifying strategies (some would call it a rule-of-thumb) which are now termed heuristics. The three heuristics commonly used by managers are availability heuristics, representativeness heuristics and anchoring and adjustment heuristics. These heuristics and their associated biases are briefly discussed below:- Biases from Availability Heuristics Have we given much thought as to why a subordinate whose office is next to the manager receives a more critical (good or bad) evaluation at the end of the year? The successes and failures of that subordinate are magnified relative to other subordinates by virtue of the close proximity. This is the essence of availability heuristics where judgements on events are based on readily available information. In most cases, more frequently occurring events are more easily recalled. It can lead to biases as other factors may influence the decision maker in terms of significance, vividness and ease of recall. Some of the common biases associated with this heuristic are the (a) ease of recall bias, (b) retrievability bias, and (c) presumed association bias. 17 a. The Ease of Recall Bias Consider the following scenario created by Russo and Shoemaker (1989) to illustrate the Ease of Recall Bias amongst decision makers. The respondents were asked the following question: Buletin INTAN indd 17 28/10/ :04:01 AM

19 Buletin INTAN Jilid 37, Bil.1/2013 Which of the following causes more deaths in the USA each year? (A) Stomach cancer (B) Motor vehicle accidents. They found that most people in the US believe that motor accidents cause more deaths than stomach cancer, whilst official figures indicated that it is the reverse by a ratio of two-to-one (Bazerman, 1998). This bias is accounted for by the frequent reporting in the mass media, where in a one year period a typical newpaper reports 137 deaths by motor accidents as opposed to one reported case of stomach cancer. This availability bias has been effectively used by advertisers in their design and frequency of messages through the mass media. b. The Retrievability Bias 18 Another common bias unconsciously committed in relation to the use of availability heuristics, is the result of the manner in which human memory is structured. We tend to structure an organisation to provide some degree of order. However, the same order may be a source of confusion if the presumed order is not exactly as suggested. For example, universities (or colleges) are structured according to faculties and normally if we search for economic expertise in the Faculty of Social Sciences or in particular the Department of Economics, the search will prove effective. If however, the expertise is not listed under that Faculty but exists elsewhere in the university, the structure is likely to lead to an ineffective search. c. The Presumed Association Bias Availability heuristics are also subject to the presumed association bias when judgements are made for the occurrence of two or more events simultaneously. For example, we frequently associate juvenile delinquency with broken homes or drug addiction and crimes. Typically if one knows of many cases of juvenile delinquency which arise from broken homes, then he or she will assign a large probability for these two events co-occurring. However, a proper analysis to establish the association would require the examination of four groups: (i) juvenile delinquent and from a broken home, (ii) juvenile delinquent and not from a broken home, (iii) non-juvenile delinquent and from a broken home, and (iv) non-juvenile delinquent from not a broken home. Buletin INTAN indd 18 28/10/ :04:01 AM

20 Quantitative Methods for Judgemental Decision Making Biases from Representative Heuristics Representativeness heuristics refer to the simplifying strategy of using similarity and stereotypes. As Nisbett and Ross (1980) have noted A botanist assigns a plant to one species rather than another by using this judgment strategy. The plant is categorized as belonging to the species that its principal features most nearly resembled. The study by Noraie (2001) noted that familiarity with the decision making situation reduces the rationality and comprehensiveness of decision makers in Malaysia. This representativeness heuristics is also reflected in discriminatory practices. Biases from Anchoring and Adjustment Heuristics In making an assessment, there is a general tendency to begin with an initial value (anchor) which can come from precedent, from the way the problem is presented, or even randomly. Dawes (1998) found that in an ambiguous problem, adjustment made based on the starting point, is subject to influence by trivial factors, thus rendering the estimate grossly unreasonable or irrational. 19 A case was done in USM where the starting salary for an engineer given by a secretary who has little knowledge of the profession was guessed at RM24,000. The question posed was as to how much a newly hired engineer for a computer firm who has 4 years working experience and good all-round qualifications would be? Based on the figure given by the secretary the mean salary was estimated at RM39,129 with the minimum given as RM7,000 and the maximum as RM72,000. The figure would have been different if the secretary had quoted RM50,000. This syndrome is very common in daily life. We often do not adjust our opinion of someone appropriately simply because we placed too much emphasis on our first impression. Human resource consultants always emphasise the need to make a good first impression at interviews and this is another example of how the bias is exploited. Clearly managers use judgements in decision making and rely on simplifying heuristics in their decision making process given the pressure of time and costs Buletin INTAN indd 19 28/10/ :04:01 AM

21 Buletin INTAN Jilid 37, Bil.1/2013 they face. The decisions made are by no means inferior in all cases however. Thus the question is: Are managers aware that they are using these heuristics and the potential biases emanating from these heuristics? In some of these cases we have provided some indications as to how statistics and other quantitative techniques can play a role in making judgements more rational and bridge the gap between the descriptive and prescriptive models of decision making. The two roles that these techniques can play in decision making situations are in reducing uncertainty and complexity. THE Role OF QUANTITATIVE METHODS in Reducing Uncertainty 20 Statistics is one of the major branches of quantitative techniques which provides inferential tools to deal with uncertainty and risk. All statistical inferences can be classified as either estimation or hypothesis testing. Estimation methods allow for quantification of uncertainty, thus making known that which is previously unknown. Besides this, the confidence level associated with most of the estimation techniques facilitates decision making from the aspect of allowing decisions to be made based upon calculated risk. At the same time, sampling theory dictates that the variance of the unknown parameter is a factor of (1/ n). Awareness of such quantitative methods will reduce biases such as insensitivity to base rate and insensitivity to sample size. Hypothesis testing, covering the numerous parametric and non parametric tests of differences, further provides avenues for reducing uncertainty by differentiating facts from fiction or gut feeling. This reduces the danger arising from selective observation. Further statistical analysis provides for the establishment of relationships, again removing uncertainties regarding associations of the various issues under consideration in decision making such as presumed association bias. Experimental design tools provide for proper analysis of situations. THE Role of quantitative methods in Reducing Complexity Noraie (2001) argued that as the environment surrounding the decision situation becomes more dynamic, hostile and complex, coupled with increasing pressure Buletin INTAN indd 20 28/10/ :04:01 AM

22 Quantitative Methods for Judgemental Decision Making of time, managers tend to use less rational and less comprehensive decision making processes. The Need to Quantify and Operationalise One of the principal characteristics of quantitative methods is the need to quantify and measure the phenomenon of interest. Measurement theory dictates that a systematic procedure is adhered to during the operationalisation process. Experience has shown that even the most common phenomenon can be very difficult to quantify. For example the quantification of the phenomenon of socioeconomic status faces a host of problems. Everyone seems to know what it is, but faces difficulty when asked to precisely define what it means. This process of quantification highlights the various interrelated issues and helps clarify the decision context and thus allows for a clearer definition of the problem. As we commonly hear, a problem that is well defined is half solved. The Multivariate Nature of the Problem Another common characteristic of the modern day decision making context is the multivariate nature of the problem. Various factors and issues are involved; thus making it difficult for the decision maker to deal cognitively with the interrelationships amongst them. As Saaty (1980) noted, a human has difficulty when comparing three or more items simultaneously and when that is attempted, problems of intransitivity of choice or preference often results, leading to inconsistent decisions. Multivariate tools can help reduce a complex situation into a simpler situation. Regression analysis for example helps identify the significant factors that impinge on the phenomenon of interest, thus reducing the number of potential variables to be taken into consideration in the decision making context. Factor analysis (another multivariate statistical technique) can group or cluster similar variables. Similarity refers to the information content of those highly correlated to each other. In this manner, the decision maker need not address each variable individually but rather as groups of variables, thus lending clarity and parsimony to the decision context. It is quite common to have 50 or more variables reduced to less than 5 groups of variables sharing a commonality. Cluster analysis helps to categorise items, individuals etc. on the basis of a whole range of variables. Multiple discriminant analysis is able to differentiate groups on 21 Buletin INTAN indd 21 28/10/ :04:01 AM

23 Buletin INTAN Jilid 37, Bil.1/2013 the basis of many variables. All these tools, and many more not mentioned here, help to reduce a complex decision making situation to one that can be cognitively handled by humans. The Final Stage of Decision Making 22 Thus far we have been dealing with statistical tools that are generally used to help transform data into information that can be usefully deployed in making the optimal decision. They seldom deal with the final stage of making a choice. This stage of decision making is by no means easy. We have situations where we have to make choices from various alternatives in light of numerous constraints, which are quite often conflicting. Such complexity is difficult to handle unless we use tools that help track the substitutability of the various choices and constraints. Mathematical programming models, of which the linear programming (LP) model is the most commonly known, can be of tremendous help in handling this complexity. Another common consideration in making choices is the definition of optimal or goodness of choice. Quite often, how good a choice is, is judged on a number of criteria. This adds to the complexity of the choice situation, particularly when the criteria are in conflict with one another. Tools such as goal programming and analytic hierarchy process (AHP) are useful when dealing with such situations. While the former deals exclusively with objective criteria, the latter can combine both objective and subjective criteria. Another relatively complex choice situation is one that deals with identifying the most efficient homogenous productive unit amongst many, where each unit converts various inputs into numerous outputs. The substitution between inputs and between outputs makes the problem a complex one. Data Envelopment Analysis (DEA) has been developed to handle such complexity. CONCLUSION It has been discussed how judgements in decision making are subject to biases that are committed either consciously or unconsciously by decision makers. These biases emanate from reliance on heuristics to simplify increasingly complex and uncertain decision making environments faced by modern day managers, who are also subject to increasing pressure of time and costs. A good judgement if made can be the most efficient way of decision making. However, judgement Buletin INTAN indd 22 28/10/ :04:01 AM

24 Quantitative Methods for Judgemental Decision Making used by non experts who may not be aware of the inherent biases can lead to disastrous decisions. The various quantitative methods that we have highlighted help to reduce uncertainty and complexity in decision making. They are by no means exhaustive as there are many more in the literature and many that are still being developed. However the indiscriminate use of these techniques without understanding the context of the problem and improper interpretation of the results of these tools have tarnished the usefulness of these methods. The use of these techniques no doubt requires the use of the computing power and capacity to overcome the problem of the number crunching associated with these techniques. In Malaysia, the development and maintenance of database needs to be looked into so that we can move forward with the expanded use of quantitative methods in the Malaysian environment. But this needs to be supported by the development of expertise not just in the technical side, but also that of the applications. 23 Buletin INTAN indd 23 28/10/ :04:01 AM

38 THE FAILED POLITICAL ECONOMY OF THE EURO CRISIS: THE SURVIVABILITY OF THE EUROPEAN UNION (EU). A POLITICAL RISK ASSESSMENT Suzianah Nhazzla Ismail The University of Sheffield United Kingdom Former Senior Assistant Director INTAN Bukit Kiara Buletin INTAN indd 37 28/10/ :04:01 AM

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40 THE FAILED POLITICAL ECONOMY OF THE EURO CRISIS: THE SURVIVABILITY OF THE EUROPEAN UNION (EU). A POLITICAL RISK ASSESSMENT Overture What has become known as the Eurozone crisis actually started at the dawn of 2010 when there was a heightened distress about the fiscal positions of a number of Eurozone member states; specifically their unsustainable fiscal credibility. Greece was the first member state to trigger the alarm (The Guardian, 2011). There were suspicions that Greece was not in the economic position to serve its debts and this had caused investors to become reluctant to procure bonds issued by the Greek government. There was panic that the Greek default could be contagious to other Eurozone member states and unfortunately it was. By November 2011, the default had spread to Ireland, Italy, Portugal and Spain. Unfortunately it has strained relations with Germany recently (The Guardian, 2011). 39 As of 2011, the Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Other European Union (EU) member states are obliged to join the Eurozone once they meet the criteria to do so (Europa, 2011). Today, around 330 million citizens in 17 countries live in the Eurozone and this number will increase as future enlargements of the Eurozone continue to exponentially spawn the benefits of the single currency in the EU (Europa, 2011). The Eurozone was initiated in 1991 with a primary purpose; to augment the economic efficiency and conserve the financial stability of its member states especially those of the EU s. The current crisis which is plaguing the Eurozone has momentous unfavorable repercussions on the EU. This is because most of the economically strong Eurozone member states (Austria, Belgium, Finland, France, Germany and the Netherlands) are also member states of the EU. One of the unpleasant consequences would be that any country that quit the Eurozone Buletin INTAN indd 39 28/10/ :04:01 AM

41 Buletin INTAN Jilid 37, Bil. 1/2013 would probably have to leave the EU. The fracturing of the Eurozone could put an end to the European Union (The Economist, 2011). OVERTURNED SCENARIO Studies supporting the merits of the EU member states joining the Eurozone have been extensive (Bird, 2010). In general, these studies postulated that membership in the Eurozone increases the economic efficiency of EU member states and promises to preserve its competitive advantage. By using Euro as a currency, a member state of the EU exhibits a high degree of sustainable economic convergence with the Eurozone economy. The economic convergence ensures that the Eurozone economy functions smoothly and that the member states of EU can grow and prosper in it (Europa, 2011). 40 The membership of the Eurozone or the Euro area fortifies the amplitude of economic affiliation between its member states. The member states of the Eurozone share the Euro as a mutual currency and having the European Central Bank (ECB) to govern the single monetary policy will harbour closer trade and financial nexus. Such amplified economic amalgamation galvanises closer coordination of economic policies (Duval and Elmeskov, 2005). In recent years, the empirical literature in the area of European political, economic and socio-cultural environment has changed. Most of the literature now focus on what will happen to the EU as soon as or if the Eurozone collapses. This scenario seems to be imminent with the economic interdependence as the Eurozone and the EU share the same member states and these member states will be facing aggravated mutual challenges (European Commission, 2009). Following World War II, France s Jean Monnet, who was acknowledged as the man who inaugurated modern Europe, argued that economic integration would be imperative in defeating inter-continental conflict in the post-war period (Fransen, 2001). The single currency was built on Monnet s belief that economic integration was cardinal to European peace and prosperity. The way to build the new union was through incremental steps toward economic integration that one day would lead to political integration (Pavoncello, 2011). However, the decline of the Euro Buletin INTAN indd 40 28/10/ :04:01 AM

42 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment exchange rate against the dollar by more than 15% in the midst of the fiery global financial and economic crisis has proven Monnet wrong and it aggravated a series of iniquitous apprehensive speculations about the impending failure of the Euro and the beginning of a new world crisis ( Ahearn, Jackson, Nelson and Weiss, 2011). THE EUROZONE CRISIS: CONTRIBUTING FACTORS There are four key features which have been identified as the contributing factors in igniting the Eurozone crisis. The features are as follows: a) The Eurozone crisis is seen to be STRUCTURAL and it stems from the specifics of the EU integration. The co-existence of poor and rich member states is visible in the EU and Eurozone. The poor member states have a significant disparity in their levels of development compared to the rich member states. In addition to that, most of the poor member states in the Eurozone are not in the position of embracing the innovative development model successfully. This hampers the EU ambition of retaining a competitive edge in the globalised environment. Such situations impede the efforts for the EU and Eurozone to efficaciously pursue an accorded economic policy with standardised guiding principles (Kaiser, 2011). 41 The European countries in the southern part of Europe are powerless and incapable of morphing their regressive and weak economies to accommodate the competitive nature of globalisation. These weak countries often view the EU and Eurozone membership as a form of escapism from their deteriorating economic conditions. Hypothetically by joining the EU and Eurozone these poor countries will have the opportunity to be rich and competitive (Reuters, 2011). The least developed and poor countries from the southern and eastern part of Europe are classified as developed nations, despite their lagging behind in education, low human capital and research development, low welfare policy, imperfect social security system, lack of capital and economic resources and ineffective administration of government (Euractive, 2011). This is the leverage that the poor and least developed European countries look forward to once they make it into the EU s list of member states (European Commission, 2011). Buletin INTAN indd 41 28/10/ :04:01 AM

43 Buletin INTAN Jilid 37, Bil. 1/2013 The underlying structural issues in the Eurozone periphery became increasingly visible following the global financial meltdown of (Eichengreen and O Rourke, 2009). Liquidity quickly dried up and several states were left with unsustainable deficits and public debts greater than their GDP. By 2010, a sovereign debt crisis, most pronounced in Greece, was spreading throughout the periphery and imperiling the future of the Eurozone (Arghyrou and Kontonikas, 2011). 42 Within the course of a year, the EU and the IMF bailed out Greece, Ireland, and Portugal. In the summer of 2011, Eurozone leaders broadly agreed to provide Greece with a second financial rescue package to allow the country to meet its debt obligations until 2014 (Erixon, 2011). But EU officials were slow to act. As fears of sovereign debt contagion to the Eurozone core intensified during the fall, EU leaders came under stiff pressure by markets and international policymakers to act decisively. In late October, they hammered out a comprehensive agreement to save Greece, shore up the continent s financial sector, and prevent further contagion (The New York Times, 2011). b) The nature of the Eurozone crisis is SYSTEMIC AND INSTITUTIONAL. It is a predicament for the European Monetary Union (EMU) to harmonise the national economic policy of its member states. This is because each member state has its own economic setup which is different from one country to another. The EMU can only regulate monetary and credit policy at the supranational level; failing to unite the different economic guidelines which are at the micro level (Reuters, 2011). Member states of the EMU handed over to the European Community the two most imperative tools of national economic policy, which are the rights to: i. ii. set the interest rates; and change the national currency exchange rate. Therefore, member states which are affected by the Eurozone crisis are stripped off of the crucial instruments of anti-cyclic regulation while battling the economic crisis (European Commission, 2010). Buletin INTAN indd 42 28/10/ :04:01 AM

44 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment c) The FISCAL NATURE AND THE LIABILITIES of the Eurozone sparked off the crisis. The launching of the single currency and a unified monetary and credit policy was inadequate in preventing the uneven development of the national economies of the member states. The European Central Bank (ECB) has had disagreements with national governments regarding the ways of resolving the emerging economic problems. This is because there is an imperfect coordination between the economic policy regulated at the national level and at the community level. Such breakdown in coordination decreases the effectiveness of the whole economic policy and economic endeavours (World Socialist Web Site, 1999). The Eurozone member states have violated the budget discipline stipulated in the Stability and Growth Pact, 10th Maastricht criteria; that is the consolidated state budget deficit must not exceed 3% of its GDP (Aslund, 2010). In the conditions of the global financial and economic crisis, the majority of the European countries launched colossal programmes to reanimate their economic situations. Some of the European countries, including the member states of the EMU and EU expedited the atonement plans to begin structural changes by massively developing infrastructures, retooling the economy and enhancing its resource and energy effectiveness (Aslund, 2010). Such exponential expenditure by the member states has caused amplified state budget deficits. The deficits of the Eurozone member states was at an average of 6.3% (European Commission, 2010) exceeding the 3% condition stipulated by the Maastricht Treaty (Greiner, Koeller and Semmler, 2010). 43 Following the Maastricht Treaty leaders of European countries with debilitated economies tended to defer tougher budgetary measures because of domestic challenges. The political price for those moves which are mandated by the Maastricht Treaty was too high for countries like Italy, Spain, and eventually Greece, and these countries entered the Euro without a profound restructuring (CME Group, 2011). The effects were not immediately felt. The periphery states thrived in the first years of the Euro, propelled by large infusions of liquidity and unprecedented access to credit from other Eurozone states. The productive capacity of the periphery however was limited by rigid labour markets and a reduction of economic competitiveness. Buletin INTAN indd 43 28/10/ :04:01 AM

45 Buletin INTAN Jilid 37, Bil. 1/2013 d) The leading EU banks in Germany and France bought two trillion Euros of government bonds in incapacitated EU member states. Strong EU member states banks have been bailing out member states that have excessive debts (The Guardian, 2011). The CREDIBILITY GAP on the part of the financial institutions between the problematical states and the EU twelve supranational governance is the fourth contributing factor to the Eurozone crisis (Lapavitsas, Kaltenbrunner, Teles, Lindo, Meadway, Michell, Painceira, Pires, Powell, Stenfors, Lambrinidis, 2010). A number of the EU member states are considered as problem states. These member states have been having difficulties in meeting the requirements of economic integration within the EU. These problem states are not at par with the advanced EU member states when it comes to economic, financial and political development; and have ineffective anti-crisis measures (Aslund, 2011). Due to this credibility fissure, the EU s capability to resolve the problems of its individual state members is questionable. 44 THE POTENTIAL POLITICAL AFTERMATH OF THE EUROZONE CRISIS ON THE EU Despite the unfavourable current states of the Eurozone, there is a widespread belief that the Eurozone will survive; because the European leaders are taking decisive actions to save the Eurozone. The giants, Germany and France, are coming up with corrective action plans to reinstate the Eurozone back to its most effective and supreme state and circumvent the probability of the disintegration of the European Union (Roubini, 2011). On the other hand, it is obvious that the Eurozone crisis will have serious implications on the EU; political and legal changes, economic changes, sociocultural changes, technological changes, and environmental changes (Duy, 2011). This research will focus on the political risks within the EU due to the Eurozone crisis. How does the deteriorating condition of the Eurozone affect EU politically? Buletin INTAN indd 44 28/10/ :04:01 AM

46 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment a) The Disruption Of EU s Political Sovereignty The global economy is experiencing a sovereign debt crisis that is spreading rapidly across certain European states; the members of the Eurozone and the EU. The sovereign debt crisis has spread to Greece, Ireland, Italy, Portugal and Spain; there is a possible domino effect throughout the Eurozone. The roots of the Eurozone crisis can be traced to certain European governments inability to manage their debt (Bloomberg, 2011). Italy, Spain and now France are under increasing pressure due to skepticism of the ability of the European leaders to resolve the debt crisis. This scenario highlights the probability of multiple defaults by other Eurozone member states. Such defaults would increase the chances that one or more members of the EU economic bloc would leave the Eurozone (Rao, 2011). The EU practices the concepts of shared sovereignty, pooled sovereignty and joint national sovereignties amongst its member states (Coughlan, 2004). Therefore the Eurozone crisis puts the EU sovereign ratings at risk as the Eurozone sovereign and banking crisis threatens the credit standing of all European government bond ratings (The Edge Malaysia, 2011). The sovereignty of the EU is dubious since there is contemplation of an Eurozone fragmentation. 45 The collapse of the EU due to the Eurozone crisis will create a lost generation of young people; the livelihoods of working age youths will be threatened by high levels of unemployment (The New York Times, 2011). If the economic conditions of the member states are not improved, various Occupy, movements will have the opportunity to gain momentum and become more aggressive (The Guardian, 2011). This is not the right formula to be associated with the EU s sovereignty. The EU s sovereignty is also at stake if the Eurozone collapses. The EU is the role model for other regions of the world to emulate successful and well coordinated economic and political integration initiatives (Borzel and Risse, 2009). The failure of the Eurozone will definitely shift the EU s accreditation from a role model to bad example. Such a scenario will reduce EU s global influence what more its sovereignty (Emmanouilidis, 2011). Buletin INTAN indd 45 28/10/ :04:01 AM

47 Buletin INTAN Jilid 37, Bil. 1/2013 The breakup of the Eurozone will cause political and economical projects within the EU to crumble. There is a possibility that Greece and Italy may leave the Eurozone; this will lead to the disintegration of the Eurozone. The dissolution of the Eurozone signals the end of the Euro as the single currency for the European Union. The EU is expected not to survive the collapse of the Euro as a huge political will is required to keep the EU on the road and that political will is absent (Hughes, 2011). b) The Degradation of EU s Political Autonomy 46 The EU is a three pillared structure consisting of the original supranational European Economic Community and the nuclear non-proliferation treaty, the Euratom, plus two largely intergovernmental pillars dealing with External Affairs and Justice and Home Affairs (Verdun, Christiansen, Schmidtke and Goold, 2007). The EU is therefore not a de jure federation, although some academic observers conclude that after 50 years of institutional evolution since the Treatise of Rome it is becoming one (Buthe and Swank, 2007). The EU possesses the attributes of a federal state. Its central government however is far weaker than that of most federations and its individual members are sovereign states under international law, so it is usually characterised as an unprecedented form of supranational union (Mann, 2009). The EU is accountable for significant areas such as trade, monetary union, agriculture and fisheries. Nonetheless, EU member states retain the right to act independently in matters of foreign policy and defence, and also enjoy a near monopoly over other major policy areas such as criminal justice and taxation. Since the Treaty of Lisbon, member states right to leave the Union is codified, and the Union operates with a more qualified majority voting (rather than unanimity) in many areas (CEPS, EPC and EGMONT Joint Study, 2007). The EU can be regarded as an autonomous organisation of states; integration has deeply affected the autonomy of some of the European countries (Baubock, 2003). The EU does not recognise sub-state political economies; this is because supra-state integration spreads over matters of regional competence. Since the EU does not recognise the existence of state autonomy, the Committee of Buletin INTAN indd 46 28/10/ :04:01 AM

48 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment Regions was created to institutionalise the autonomous units of the EU (Marks, Hooghe and Blank, 1995). The dire economic condition of the Eurozone is giving a signal that there is a propensity for a member state to withdraw from the Eurozone. Any country that leaves the Eurozone will most likely have to leave the EU. There will be a major fracture of the Eurozone and this could put an end to the existence of the EU. Member states that have decided to leave the Eurozone might set up a new grouping of a separate Europe. There is a notion that countries which have left the Eurozone could bring into existence the power of ultranationalist or extremist parties. This is because these newly deprived post EU states feel that the Treaty of Versailles impinged sternly on them when they were a part of the EU and Eurozone. If this notion materializes, international tensions could dramatically rise; the impoverished states might turn against the EU core states. The collapse of the EU will also cause the survivability of NATO to be questionable. NATO has been strained repeatedly by disagreements over its wars against Serbia, Iraq and Libya (Chifu, 2009). Most NATO states have been slashing defence budgets due to fiscal austerity; and the US has long moaned that the European states are not spending enough on defence. With Europe in disarray, the US would no longer be able to rely on Europe as its security partner (The Economist, 2011). 47 c) EU s Impassive Role in International Relations It is stupendously clear that the Eurozone crisis has significant repercussions on the EU foreign policy. The leaders of the Eurozone member states are engaged full time in managing the crisis (bailing the Euro, reducing expenditure and stemming the tide of unemployment). The situation forces the leaders to have less time and desire to understand and strategise about on how to react to foreign policy demands and requirements; foreign policy is being pushed to the bottom of their list of priorities. Buletin INTAN indd 47 28/10/ :04:01 AM

49 Buletin INTAN Jilid 37, Bil. 1/2013 The EU has not played its role in the world of international relations; as the EU is too preoccupied in handling the Eurozone crisis. Its foreign policy has been put aside and postponed; be it in relation to Vladimir Putin s return to the Russian presidency or even the revolutionis in Egypt, Libya, Tunisia and Ukraine. Foreign policy is costly; it buys the EU various degrees of influence, power and diplomatic weight. The amount of expenditure that the EU spends for foreign policy is actually a result of a trade-off between moral commitments, self interest, and politicians accountability to voters. With a growing pie, politicians and decision makers could get a decent balance between these various imperatives; but with a shrinking pie, a more egoistic narrow-mindedly voter-oriented behaviour is likely to be elicited. This will pin down EU member states aspiration to allocate funds internationally. The increasing numbers of the unemployed and salary deductions will make the member states become less altruistic internationally and put pressures to spend money domestically. 48 d) The Revival of Communism and the U.S.S.R. If the Eurozone disintegrates and the EU collapses, the less developed member states such as Bulgaria, Romania and the former Yugoslavia states will have an absent anchorage policy which will assist them in converging with the economic, financial, legal and social norms of the Western European countries. This condition will indirectly pave the route to the occurrence of ethnic violence such as what had happened in Bosnia, Kosovo and Macedonia. The dismissal of the EU as a powerful block will be the long awaited event for Russia. The demised U.S.S.R. will gradually reinstate its supremacy. Russia will have the opening to reassert its influence in Central and Eastern Europe. Vladimir Rasputin has revived Russia s geopolitical mechanics by immensely focusing on rebuilding a sphere of influence in the former U.S.S.R.; the Kremlin will soon take over the EU s political autonomy and have the leverage of meddling in the political affairs of Poland, Slovakia, Romania, Bulgaria and so forth. Buletin INTAN indd 48 28/10/ :04:01 AM

50 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment CONCLUSION The success of the Eurozone strongly determines the economic performance of the EU; and by far the Eurozone is the most advanced area of the European integration. The Eurozone is vital since it anchors the stability in Europe and the EU. Therefore it is exhorted that the governments in the Eurozone must prescribe the right panacea in order to cure the ailing economy of its member states. As advocated by Karl Marx s apprentice; Antonio Gramsci (a Neo-Marxian) in his book Prison Notebooks ; the superstructure (politics) and base (economy) of a country reciprocate each other. If the base (economy) of a nation state is in a regressing momentum it will be reflected on its superstructure (political) stability and vice versa. 49 Buletin INTAN indd 49 28/10/ :04:01 AM

52 The Failed Political Economy of the Euro Crisis: The Survivability of the European Union (EU). A Political Risk Assessment Gary Marks, Liesbet Hooghe & Kermit Blank Integration Theory, Subsidiarity and the Internationalisation of Issues:The Implication for Legitimacy. EUI Working Paper RSC No. 95/7 Badia Fiesolana, San Domenico Robert Schuman Centre. Graham Bird The Eurozone: What Now? The Journal Current Economic Analysis and Policy. Volume 11, Number 3, pages Helmut Kaiser The Eurozone: Challenges and Structural Problems. Global Policy Volume 2, Issue 3, pages /11/ Iulian Chifu Nato New Strategic Concept. Romanian Approach Editura Curtea Veche Bucureti. Janis A. Emmanouilidis All Roads Lead to Frankfurt The Results of an Enigmatic Summit. European Policy Centre. Joint Study CEPS, EGMONT and EPC The Treaty of Lisbon :Implementing the Institutional Innovations. Kristy Hughes The Collapse of Euro. CNN Interview. 51 Michael G. Arghyrou and Alexandros Kontonikas The EMU Sovereign Debt Crisis: Fundamentals, Expectations and Contagion. European Commission. Mohamed Ali Trabelsi The Euro-Zone: Is It the Crisis Ahead! Journal of EuroEconomica, Vol 28, No 2. Nouriel Roubini Rising Risk of Eurozone Breakup. Peterson Institute for International Economics. Pakistan Times Greece Could Not Exit Euro Without Leaving EU. Mumtaz Hamid Rao. Rainer Baubock Multilevel Citizenship And Territorial Borders In The EU Politic. Paper presented at the conference: Transformations of Statehood in a European Perspective. Austrian Academy of Sciences, Research Unit for Institutional Change and European Integration (IWE Working Paper Series). European University Institute, Florence. Raymond J.Ahearn, James K.Jackson, Rebecca M. Nelson, Martin A.Weiss Congressional Research Service The Future of the Eurozone and US Interests. Stanislav Mashagin Greece and Italy Will Have to Leave the Euro. Russia Beyond the Headlines. Buletin INTAN indd 51 28/10/ :04:01 AM

53 Buletin INTAN Jilid 37, Bil. 1/2013 Tanja A. Börzel and Thomas Risse Diffusing (Inter-) Regionalism the EU as a Model of Regional Integration. KFG Working Paper No. 7. The Economist Britain and the EU Summit: Europe s Great Divorce. The Economist Will the Eurozone Break Up. The Edge Malaysia Down with the Eurozone. The European Commission EU Economy: 2009 Review Economic Crisis in Europe: causes, Consequences and Responses. The European Commission Commission Staff Working Paper Cohesion Policy: Responding to the Economic Crisis: A Review Of The Implementation Of Cohesion Policy Measures Adopted In Support Of The European Economic Recovery Plan. The Guardian The Occupy Movements Are The Realists, Not Europe s Ruling Elites. The Guardian Shock As 6bn German Bond Sale Ends In Failure. 52 The New York Times European Debt Crisis. The New York Times While Germany Prospers, Unemployment Strangles Others. The Reuters Euro Zone Staring Into the Abyss, Waiting For ECB. The Reuters Analysis: Counting the Cost If EMU Fails. Tim Buthe and Gabriel T.Swank The Politics of Antitrust and Merger. Review in the European Union:Institutional Change and Decisions from Messina to Working Paper Series No Center for European Studies. Tim Duy Europe Still Heading For Collapse. The Guardian. World Socialist Web Site The Euro s Launch Heralds Major Economic And Social Conflicts. Buletin INTAN indd 52 28/10/ :04:02 AM

96 INTERCONNECTED BY INTRUSION: A BLESSING IN DISGUISE? INTRODUCTION 2013 Lahad Datu Armed Intrusion conjures images of infiltrated borders, skirmish episodes, bloodshed gunfights, pinned-down heroes and invasion by raiders. Never ever, in our wildest dream that such violent was emerging right on our venerated land Malaysia. We might have read history of insurgencies, armed separatists, secessionist movements and inter state conflicts takes place decades ago. But, who would have thought that the peace preserved and harmony enjoyed for over fifty years was finally confronted. March 2013 has marked a black retention in the nation memoir when a total of 68 people were killed in Sabah over an armed intrusion by a group of self proclaimed Royal Security Forces of the Sultanate of Sulu. The tragic invasion crunch had instantly turned the global spotlight to Lahad Datu. In resolving the crisis, United Nation (UN) Secretary General, Ban Ki-moon had sought an end to the conflict by advocating both sides to sort out the incursion peacefully. Consequently, on March 8th 2013, Ban met Ambassador Extraordinary and Plenipotenia, Malaysian Permanent Representative to the UN, His Excellency Dato Hussien Haniff restating his hope for a peaceful solution on the tangling issue to avoid more casualties. This had echoed a collaborative effort between both countries when Philippine Foreign Affairs Secretary, Albert del Rosario urged Filipinos intruders to return home to their families while our Prime Minister, Dato Sri Najib Tun Razak engaged and tolerated relevant negotiations while assuring Malaysian that our safety and sovereignty will be protected. 95 Buletin INTAN indd 95 28/10/ :04:03 AM

97 Buletin INTAN Jilid 37, Bil. 1/ A map illustrating inruders point of entry during 2013 Lahad Datu Armed Intrusion. (Source: After months of battle, the crux has conclusively ended and most importantly offered us 1001 takeaways in various perspectives peculiarly on nation building. It is opt to say that, Lahad Datu tragedy may sound as a bygone history but it has definitely packed a big punch to every single Malaysian especially to those who had personally experienced the adverse impact of this incident. However, not all of us have seen this crisis in an outrageously rotated angle. Every cloud has a silver lining. If we could loosen a grip of seeing this incident as purely fatalistic, this crisis can also be seen as a blessing in disguise when unity was unwittingly restored and eventually revalued. In defiance of all the extensive arrays of jaw dropping devastating news, the nation had once again knitted together coalescing as one fighting for our sovereignty. Through Lahad Datu tragedy, re-establishment of nation building can be observed in four utmost standpoints; cherished peace, restored unity, elevated patriotism and appreciation of history. Buletin INTAN indd 96 28/10/ :04:03 AM

98 Interconnected by Intrusion: A Blessing in Disguise? CHERISHED PEACE Since the year 1957, Malaysians embraced the tranquil peacefulness whilst showcasing a superb togetherness despite its diversity. Standing at 27 million population that hails from heterogeneous ethnicity and beliefs, we have no predicament sheltering beneath the same overshadowing supremacy. In fact, it is evidence that we are passionate to perform our shared responsibility in sustaining placid harmony. However, as post-independent generations who rejoice persistent solidarity, most of us are not capable of imagining the hardship of living on a land that afflicted by turmoil. Moreover, it has become a fundamental human nature that we will not comprehend the price of peace, security and stability until we lose it or have to live without it. Reason being is we do not know what it would be like if we have to work for it. Contradictory, those who had experienced World War, understood distinctly the agony of losing peace, security and stability, simply because they valued what they struggled for. In another words, it is the dearness that we give value for. Likewise, when intruders infringed upon our territorial integrity that was when we started to cherish peace we used to enjoy. Just like a knee-jerk, when difficulties bump us off-track, we will be able to witness reasons behind the happenings, thus appreciate whatever we previously owned. 97 In the eyes of foreigners, Malaysia is renowned for its safety. Even so, being the one of the safest countries in Southeast Asia and ranked 19th in the world is not a ground for being negligent on our security business. By the same token, this crisis served as an eye-opener to bolster the existing soundness that we are living in. Seeing is believing; only with those physical evidences of violences, wars, terrorist threats and hostilities then we were convinced that peace and harmony ought to be treasured at all cost. What the eyes do not see, the heart does not grieve over. It is therefore, the crucial lesson to be learnt from the intrusion is; we must never take safety for granted even in times of peace. Interestingly, on March 8th 2013, Malaysians fought fire with flowers through an event creatively named as Ops Bunga encouraging passers-by to flood the Philippine Embassy gates with flowers that symbolised peace. According to the organiser, Joseph Lee, Ops Bunga has proven how Malaysian disagree upon the blitz and love peace. Looking at another stance, through this intrusion we had also wholeheartedly acknowledged the police, armed forces and other related agencies for contributing to such a high mark defending our country during the crisis. Since education and awareness are Buletin INTAN indd 97 28/10/ :04:03 AM

99 Buletin INTAN Jilid 37, Bil. 1/2013 the catalyst for a nation development, it is paramount for Malaysian, young and old to learn an insight in cherishing peace. RESTORED UNITY 98 Unity is instilled in the hearts and minds of the multiracial citizens of Malaysia. More often than not, perpetually articulated 1Malaysia spirit is manifested in events of togetherness such as National Day and festive seasons. Nevertheless, Lahad Datu crisis managed to unify Malaysian in a vastly different operandi. The most commonly proclaimed and promulgated unity was evidently explicit during the crisis through various collective expression of concern by fellow Malaysians wherever they are. Instantly, due to this crisis, we were wearing other hearts on our sleeves by demonstrating our concerns boldly. For instance, in less than a month, millions of ringgit was collected through Tabung Wira Lahad Datu, established exclusively to commemorate the sacrifices made by our perished security personnel in defending our country. On March 31st 2013, monetary contribution raised for this trust fund reached RM3.2 million and donations keep on coming in which substantiated Malaysian believe in the spirit of a trouble shared is a trouble halved. Apart from that, attentive individuals, regardless of religious beliefs had channeled their heartfelt care and sympathy by dints of endless prayers for our heroes safety in bringing back our sovereignty, protecting us from fear, hatred and injustice. On March 12th 2013, it is estimated around 3,000 Muslims overflowed Masjid Ar-Rahmah, Taman Wira, Mergong, Kedah for Solat Hajat Perdana Ops Sulu. Such event has gone virally widespread and common since the incursion occurred not only in mosques but also in the churches and temples all over the states of Malaysia. Plainly, Lahad Datu crisis proved our undivided backing to the authorities and security forces upon a threat to national security. Netizens in the other hand have called on all Malaysians to stand consolidated and manifested that such incursion is not tolerable at any cost. Interestingly, Facebook and Twitter users as well as bloggers had enthusiastically flaunted their support by publicising thoughtful messages like Pray for Sabah and Solidarity for Sabahans. Sleep Now, a tribute song for our fallen heroes by Josaphine Hedikusumo, a Singaporebased Malaysian lawyer that picked up thousands of YouTube likes in just no time signified honest gratitude by netizens to our warriors. Clearly, as an entity, we are Buletin INTAN indd 98 28/10/ :04:03 AM

100 Interconnected by Intrusion: A Blessing in Disguise? concern by what were faced by our fellow Malaysian and this unity that scared our enemies away just like the saying goes cut a blade of grass and you shake the universe. For once, it seems that there is no distinction exist between us according to lineage or race. With one shared goal, we were united in supporting the measures taken by the authorities to quell the threat without any fears and indifference of thoughts. Due to the crisis, our existing unity got its spur which can be analogised as a dead clock getting new batteries. ELEVATED PATRIOTISM The populace of Malaysia owes an irreparable debt and accord cordial recognition to our troop who has defended our territorial integrity and sovereignty. As a matter of fact, during the incursion; bullets really flew, bombs really exploded and casualties really happened. Loss of life and injuries buttressed by our national heroes markedly proved their undivided homage to our country. Nevertheless, bitter pills may have blessed effect. Such occurrences were hitting the nail right on our heads and eventually left scars in our heart, resulting in an elevated sentiment of nationalism. It is undeniable that being patriotic entails deeper meaning, more than just waving flags, singing national anthem, and writing patriotic posts and blogs. Contrariwise, patriotism is not something that can be worn, it is not something that can be nurtured effortlessly like taking a duck to water but it is all about genuine devotion and loyalty for Malaysia and the burning passion to see our country as a better place to live in. Notwithstanding, as civilians, we may not be holding weapons in safeguarding our land on the battlefield like the security force personnel did, however we did play our respective roles with high spark of patriotism during Lahad Datu Armed Intrusion. For instance, as requested by the authorities, we validated our patriotism by ensuring the confidentiality of the security force s tactical information thus preventing it from leaking to our enemies. We highly respected the duty of our armed forces. Micheal Ignatieff, a distinguished Canadian politician once said Patriotism is strong nationalistic feeling for a country whose borders, legitimacy and ethnic composition is taken for granted. Often, veracious nationalism is revealed in times of despair. 99 Similarly, following the incidence, our sense of attachment to our homeland was fueled up. This is extremely obvious especially among the younger generations. For instance, at the early age of twelve, a young Malaysian Mohd. Dinnie Buletin INTAN indd 99 28/10/ :04:03 AM

101 Buletin INTAN Jilid 37, Bil. 1/2013 expressed his frank sentiment of patriotism when he told his mother that he had switched his ambition to a solider when his previous career choice was to be an engineer. The Chairman of the National Service Volunteer Brigade, Mohd Syafik Mohd Taufik also agreed that sentiment of ownership to the country was fostered through the intrusion and people are well-aware of their accountability to keep the country as a safe place to live, work and play. Deputy Vice Chancellor of National Defence, University of Malaysia (UPNM), Associate Prof. Mohamed Fadzil Che Din, also admitted that patriotism which was rarely deliberated among youngsters are now mainstreamed effectively. APPRECIATION OF HISTORY 100 As a matter of fact, history is more than just divulging event of the past academically. It is not supposed to be learnt only by memorisations but it is supposed to be recognised through rigorous interpretation and sophisticated analysis of the yesteryears. Although Lahad Datu siege is over, another substantial lesson learnt is to appreciate history more than just past documentations. The importance of historical research was evidently lucid when the whole Malaysian relied heavily on such solid facts to defeat the claim for royal lineage, titles, prerogative and territory made by descendants of the Kiram family. Exceptional battle tactics or perhaps immense physiological strategies may equip us insufficiently in whipping the claim because a pen is always mightier than the sword. We know perfectly that their claim upon Sabah was radically dubious as it strayed away off the beam. However, without pertinent historical facts, we can never grain the gospel truth. Likewise, Profesor Emeritus Koo Kay Kim, one of the most eminent Malaysian historians eloquently believes that history is the mother of all disciplines as the history help us in making sense of the present. Confucius teachings in the other hand illuminated that we need to study the past if we want to define the future. It was through this siege that Malaysians took initiative to hunt for historical evidence in rebutting Sulu Sultanate claim on Sabah. As general public, although we are not capable to peel the whole chronology proficiently, at least we manage to reveal the basic historical facts about this issue assisted by the advancement of mass media. We are informed that prior to the formation of Malaysia, Sabah was formerly known as North Borneo. It is true that The Sultanate of Brunei and Sulu, the North Borneo Chartered Company, Japan and the British once governed Buletin INTAN indd /10/ :04:03 AM

102 Interconnected by Intrusion: A Blessing in Disguise? Sabah. However, in 1963 through Cobbold Commission, the state of affairs was revamped when Sabah officially joined Malaysia on September 16, 1963 after gaining independence on August 31, It is crystal clear that Sabah legally belongs to Malaysia. As it was sanctioned by the international law, any claim upon Sabah by other party is not valid. Again, history need to be looked upon highly not only just as events of the past, it also has the aptitude in developing distinctive historical thinking skills to make sense of new and simultaneously intricate developments. Marcus Cicero once said, History is the witness that testifies to the passing of time, it illumines reality, vitalises memory, provides guidance in daily life and brings us tidings of antiquity. A BLESSING IN DISGUISE All in all, Lahad Datu crisis is a wake up call serving food for thought to all Malaysian in cherishing peace, restoring unity, elevating patriotism and appreciating history. Even in all beliefs uphold by fellow Malaysian, the teachings reinforced great emphasis on these qualities. For example, in Bible English Standard Version, Peter, Verse 2:9-10, it is transparently stated that But you are a chosen race, a royal priesthood, a holy nation, a people for his own possession, that you may proclaim the excellences of him who called you out of darkness into his marvelous light. Once you were not a people, but now you are God's people; once you had not received mercy, but now you have received mercy. Hinduism in the other hand, instill Dharma as one of the prominent themes in their beliefs highlighting good ethics and duties covering path of righteousness and living one's life according to the codes of conduct as described by the Hindu scriptures. Everything happens for a reason including the bitter trails of tragic Lahad Datu seige. In the translation of Al-Quran verse 2:216, but it may happen that ye hate a thing which is good for you, and it may happen that ye love a thing which is bad for you. Allah knoweth, ye know not. We might not likely see the light at the end of the tunnel in just a trice, but after everything set the seal on, it is authenticated that 2013 Lahad Datu Armed Intrusion is indeed a blessing in disguise. 101 Buletin INTAN indd /10/ :04:03 AM

126 GOOD GOVERNANCE IN PUBLIC ADMINISTRATION: MALAYSIA S EXPERIENCE DEFINITIONS ON GOVERNANCE AND GOOD GOVERNANCE Governance refers to the act or manner of governing. It can be related to decisions that define expectations, grant power, or verify performance. Governance consists of either a separate process or part of decision-making or leadership processes. In modern nation-states, these processes and systems are typically administered by a government. As a process, governance may operate in an organization of any size: from a single human being to all of humanity; and it may function for any purpose, good or evil, for profit or not. A reasonable or rational purpose of governance might aim to assure (sometimes on behalf of others) that an organization produces a worthwhile pattern of good results while avoiding an undesirable pattern of bad circumstances. Governance can be used in several contexts such as corporate governance, international governance, national governance and local governance. In the case of a business or of a non-profit organization, governance relates to consistent management, cohesive policies, guidance, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolving policies on privacy, on internal investment, and on the use of data. There is a plethora definition of governance. It encompasses concepts such as leadership, stewardship, accountability, ethical behaviour and control. As a result, it is difficult to provide one all-embracing definition that satisfies all those with a view on the matter. The effectiveness of governance arrangements has a significant impact on how well organisations meet their aims and objectives. 125 Good governance promotes equity, participation, pluralism, transparency, accountability, and the rule of law, in a manner that is effective, efficient and enduring. In translating these principles into practice, it needs free, fair and frequent elections, representative legislatures that make laws and provides oversight, and an independent judiciary to interpret those laws. Buletin INTAN indd /10/ :04:03 AM

127 Buletin INTAN Jilid 37, Bil. 1/2013 GOVERNANCE OR GOVERNMENT: A THIN BOUNDARY LINE 126 The differences between the term governance and government can be described in terms of a geo-political entity (nation-state), a corporate entity (business entity), a socio-political entity (chiefdom, tribe, family, etc.), or any number of different kinds of governing bodies. The term government may be referred to formal institutions of the state and their monopoly of their legitimate coercive power. Government is characterized by its ability to make decisions and its capacity to enforce them. Some political scholars defined governance as the government s ability to develop and enforce rules, and deliver services, regardless of whether that government is democratic or not. Sammy Finer (1970) outlines governance as an important characteristic in defining government which include; the activity or process of governing or governance, a condition of ordered rule, those people charged with the duty of governing or governors and the manner, method or system by which a particular society is governed. A good government could consist of a set of inter-related positions exercising coercive power that assures, on behalf of those governed, a worthwhile pattern of good results while avoiding an undesirable pattern of bad circumstances, by making decisions that define expectations, grant power, and verify performance. Government is a trust, and the officers of the government are trustees. And both the trust and the trustees are created for the benefit of the people. - Henry Clay, American Statesman and Senator ( ). If government is to be truly government for the people, if the public is to be able to participate in government and to experience its benefits, the public must be properly informed about government and its affair. Australia s Auditor General Report, GOOD PUBLIC GOVERNANCE Good governance can be perceived as the highest state of development and management of a nation s affairs whereby people participate in decision-making Buletin INTAN indd /10/ :04:03 AM

128 Good Governance in Public Administration: Malaysia s Experience processes, that service are delivered efficiently, that human rights are respected, and that government is transparent, accountable and productive. Criticism from the public on service quality of public sector is unavoidable because of the sheer size of the public service. Any dissatisfaction with a particular department or a branch office in the most remote area will be highlighted alleging that the entire public service is to be blamed. Understandably, being a taxpayer, one would like to exercise one s rights to the fullest. If governance is defined as policy formulation and implementation through synergistic participation of private and third sector, then good governance is defined as the exercise of power by various levels of government that is effective, honest, equitable, transparent and accountable. The emphasis is on the end result, whereby the citizens enjoying a higher quality of life than before. It can be concluded that good governance include; (1)Economic liberalism which constitutes private ownership, more investment and greater equality, (2) Political pluralism, which refers to participation of people in the development process, decentralisation of authority from the centre and democracy, (3) Social development which includes human rights, rule of law, independent judiciary and free press, (4) Administrative accountability which refers to transparency, less corruption, economy, efficiency and effectiveness; and (4) Public sector reforms, strategic planning and management of change. 127 MALAYSIA S EXPERIENCE The term constitutionalism may be described as the concept of limited government, whereupon the power of the different wings of government are defined, and the rights of the governed, enshrined. It covers various concepts which can be employed to check exercise of power by the government which includes the doctrines of separation of powers, rule of law, limited government, good governance, transparency, accountability, democracy and human rights. The brief ideas of the doctrine of Separation of Powers include 3 functions of government (legislative, executive and judicial), each of these 3 functions should be vested in one organ of government namely the legislative, the executive and the judiciary with no overlap, each organ act as check and balance, to concentrate more than one function in any organ of government is a threat to individual liberty, Buletin INTAN indd /10/ :04:03 AM

129 Buletin INTAN Jilid 37, Bil. 1/2013 a government of separated powers is less likely to be tyrannical and more likely to follow the rule of law. Malaysia is a democratic country where the essence that the government is formed by the consent of the governed, which is through election. The Constitution requires that a general election must be held at least once every 5 years. However, the Prime Minister may advice the Yang di-pertuan Agong (The King) to dissolve the Parliament at any time before the 5-year period has expired. Voting is no longer deemed as privileged but a right and the effective tool of every citizen. The Cabinet of Malaysia is the executive branch of Malaysia's government led by the Prime Minister. According to the Article 43 of the Constitution, members of the Cabinet can only be selected from members of either houses of Parliament. Parliament holds crucial role in superintending the actions of the Executive branch. GOVERNANCE IN CIVIL SERVICE 128 Public Administration is concerned with the implementation of government policy, and is an academic discipline that studies this implementation and prepares civil servants for working in the public services. Talking about public services, the Malaysia Federal Constitution defines that the public services comprises of armed forces, judicial and legal services, general public service of the Federation, police force, joint public services mentioned in Articles 133, public services of each State and education service. Each category has its respective commission for managing over its service members which include appointment, confirmation of service, conferment into pension status, promotion, transfer and exercise discipline control. Except for the police force commission, the Constitution does not allow any legislative member be appointed as a member of any Commissions. As an agent for the government, public services are firmly committed to the establishment of quality administration since the strength of the government relies on the effectiveness of its agents. The flow of public service reformation in Malaysia includes: administering and providing essential public services and self-guarding national security in the 1960as, planning and implementing socio-economic programmes to support the New Economy Policy in the 1970s, facilitating and regulating economic activities Buletin INTAN indd /10/ :04:03 AM

130 Good Governance in Public Administration: Malaysia s Experience during the industrialisations period in the 1990s and modernising and instilling human capital values to combat maladministration in the new millennium in the 2000s. GOVERNANCE IN PUBLIC FINANCE MANAGEMENT Accountability is a crucial mainstay for the public finance management. The governance structure is laid in the mother of national statute namely Federal Constitution. Minister of Finance is the sole person answerable to the Parliament on the national financial affairs. The respective ministry will issue circulars and orders to impose the new rulings on financial management to the line ministries in order to ensure that the public monies are prudently, efficiently and effectively managed. Furthermore, the Auditor General s Office shall lay the annual report before the Parliament on the affairs on the financial management in term of compliances. GOVERNANCE IN SERVICE DELIVERY 129 Accountability in governance is an issue in most countries and a cornerstone of all. The importance of an efficient and ethical administrative system in developing and implementing sound development policies and programmes is well recognised. Governance is crucial especially in the public administration where there is a need to reform the public sector to overcome many unethical and inefficient bureaucratic dysfunctions and problems. The principles of good governance have been operationalized through various circulars issued by the Central Agencies ranging from human resource management, financial management, development policies and modernization of government procedures. MECHANISMS OF GOOD PUBLIC GOVERNANCE IN MALAYSIA Special Cabinet Committee on Governance Management (SCCGM) was established in 1988 due to raising concern on the level of corruption in the Government sector. In 1997, the functions and roles of the SCCGM were strengthened and the Committee was subsequently renaming the Special Cabinet Committee on Integrity of Government Management (SCCIGM), a very high level Buletin INTAN indd /10/ :04:03 AM

131 Buletin INTAN Jilid 37, Bil. 1/2013 committee chaired by Prime Minister himself. The Committee aims to establish a Government administration and public service that is efficient, disciplined ad imbued with the highest integrity by enhancing noble values. The Committee also focuses on efforts to overcome problems and weaknesses particularly in the Government financial management, public administration, handling of disciplinary cases, corruption, abuse of power and malpractices as prohibited by the regulation, law and religion. The Chief of Secretary to The Government s circular in 2007, is a clear signal to institutionalise the principles and practices of good governance in order to further enhance and strengthen the overall capacity of the Public Sector towards achieving the National Mission. It spells out the principles of good governance in the Public Sector as integrity, accountability, stewardship and transparency, 130 In 2009, the Malaysia Government administration of management system is structurally strengthened via the issuance of Prime Minister s Order No. 1 Year 2009 for establishment of the Committee on Integrity Governance (Jawatankuasa Keutuhan Tadbir Urus, JKTU) to improve and strengthen the Government administrative and management system, enhance governance and reduce bureaucratic red-tape to prevent corruption. JKTU is assisted by four (4) Expert Groups, specialised to recommend the necessary improvement in the administration of government machinery for respective areas which include: policies, laws and regulations, systems and procedures, noble values and code of ethics, client s management, internal control, detection, punitive and rehabilitations measures and recognition and appreciation. The ethical conduct of public officials includes Public Officers (Conduct and Discipline) Regulations 1993, The Judges Code of Ethics 1994; and Code of Ethics for Member of Parliament. In the Malaysian version, the Ombudsman system (Public Complaints Bureau (PCB)) was set-up in 1971 under the Prime Minister s Department. It gives the opportunity to the public to file complaints pertaining to non-compliance to systems and procedures with regard to the public sector services. The principle of accountability through the Ombudsman may increase the public confidence towards the administrative practices and also reducing the abuse of power, breach of trust and others. Buletin INTAN indd /10/ :04:03 AM

132 Good Governance in Public Administration: Malaysia s Experience Other mechanisms to promote and embrace good public governance include Business Ethics Institute of Malaysia (1997), Malaysia Institute of Corporate Governance (1998), Malaysian Institute of Integrity (2003), National Integrity Plan (2004), Enforcement Agencies Integrity Commission (2011), Integrity Vetting, Letter of Undertaking, Asset Declaration of Ministers and Government Servants and Circular on Gift Giving and Receiving. GOOD GOVERNANCE AND CORRUPTION Corruption in the public sector hampers the efficiency of the public services, undermines confidence in public institutions and increases the cost of public transactions. Promoting good governance in all its aspects, including the rule of law, improving efficiency and accountability of the public sector, and tackling corruption is an essential element of a framework within which economies can prosper. The most important and powerful institutional mechanism available to check administrative abuse in Malaysia is the Malaysian Anti-Corruption Commission (MACC, 2009). Established in 1967 by the name Anti-Corruption Agency (ACA), it began with a small group of officials entrusted with responsibility and given powers to prevent and eradicate all forms of misuses of powers, corruption, and maladministration from the society. 131 GOOD PUBLIC GOVERNANCE: IS IT A MUST? Since the government is dealing with the legitimate mandate to act on public or society, the potential of the unlimited magnitude of consequences can be caused from the government policies. The unchecked power tends to give the unlimited spectrum of power abuses and corruptions. It is due to the conditions that only the government is allowed to enforce the laws or acts which can permit confiscate the personal property, imprisonment and a death penalty to any misdeed of its citizen, for the cause of public interests. The same view is echoed by Lord Acton ( ) Power tends to corrupt, absolute power corrupt absolutely. Raja Azlan Shah in Pengarah Tanah dan Galian, Wilayah Persekutuan v Sri Lempah Buletin INTAN indd /10/ :04:03 AM

133 Buletin INTAN Jilid 37, Bil. 1/2013 Enterprise Sdn Bhd., share similar sentiment when he stated that Every legal power must have legal limits, otherwise there is dictatorship. To rule is easy, to govern difficult. ~ Johann Wolfgang von Goethe ( ): German philosopher and chief minister. 132 The society basically comprises of three components; government, public and private enterprises. In the old days, the last two segments (public and private enterprise) can be considered as a single large component and all goods and services are rendered from the government. The concept of governance describes certain forms of interaction between the state and society. This mode of politics is considered modern in which the plurality of actors is acknowledged. Societal problems are not solved by state institutions only; rather, the state interacts with other actors, for example, with private companies or civil society organisations. This interaction is necessary because among other reasons the quality of these problems exceeds the capacity of states. This holds true for social problems, for example, in the context of poverty reduction or demographic change, as well as for environmental problems, climate change and so forth. Intense public scrutiny is a fact of modern governance. There is greater societal oversight of state institutions and public agencies than ever before. Important institutions like civil service, the police, the military, the judiciary, the anti-corruption commission are under tremendous pressure to perform. This is generally a good thing and should be welcomed in the interests of good governance and clean and honest government. It is therefore imperative for public officials to continuously improve on the delivery of public goods and services in an effective, efficient, equitable and ethical manner. The rising of the third sector (third force) known as civil society which contains the Non-Governmental Organisations (NGOs) focused in specialised area such as media, trade unions, professional bodies, green movements, etc. has challenged the credibility of government decisions. NGOs dedications and `no self-interest look was paid off when public give more trusts and ears to NGO s arguments Buletin INTAN indd /10/ :04:04 AM

134 Good Governance in Public Administration: Malaysia s Experience rather than an official explanation by the government. This, however does not justify for some incidents where civil society becoming uncivil in their demands. GOOD PUBLIC GOVERNANCE: THEORETICAL ANALYSIS The two fundamental responsibilities that the governments have towards their people are to ensure their well-being as well as their security. Since good governance warrants the public confidence over the public institutions presence and delivery, it is important to anticipate the level of public confidence on public institutions, looking from the analysis of legitimacy theory and principal-agent theory. Legitimacy theory describes that the absence of good governance can undermine the legitimacy of public institutions and disrupts policy goals. The huge amount of public funds annually allocated for public institutions if not spent prudently will create suspicious financial management indiscipline. A ministerial programme during the election campaign as such will deem as incongruent with society perception on neutrality of state institutions. In principal agent-theory, governance is about the performance of agents in carrying out the wishes of principal, and not about the goals that principals set. A well-functioning public expenditure management (PEM) system is considered to be a critical pillar of government efficiency. The Ministry of Finance (MoF) acts as the principal, providing public funds to line ministries to implement a set of actions. The contract must therefore specify a level of output. Line Ministries can be seen as agents of the MoF (the principal) because they are required to produce a certain level of public output including the quality of this output in exchange for their budget appropriation. As a principal, the minister s main objective is to make sure his agent implements the required task. In this principal-agent model issue, the MoF has the capability in measuring and judging the outcomes. 133 Public procurement is a key function of government. Effective and efficient procurement processes are essential in ensuring that scarce public funds are well spent and the public projects are properly carried out. However, such processes are often best by waste, corruption and inefficiency. The other aspect is the shared vision among the top leaders (Minister and Secretary General of Ministry) in the line ministries. Even though they hail from different types of disciplines, it is important Buletin INTAN indd /10/ :04:04 AM

135 Buletin INTAN Jilid 37, Bil. 1/2013 for them find a mutual understanding and work in a synergy. Nevertheless, there is a possibility for the team to dissolve since the Minister has the political power to command the rest. In this case, it is not necessary to form good and effective governance. However, further strategies are required. CONCLUSION 134 Issues of good governance are being widely discussed and debated worldwide. In fact, there is a need to understand not only the social, economic and political imperatives that underpin the nature and purpose of good governance, but also to appreciate the cultural sources and traditions which have contributed to, and influenced, the way we govern societies and manage our business enterprise. The traditional roles played by the government are gradually taken over by several non-government segments; civil society, business communities and other upcoming new forces. The residual authorities hold by the government sector if not being tied-up with a good governance, will stamped out the legitimacy of public institutions. Without mandate and legitimate power, the government roles no longer relevance to the public needs. At the end, the public affairs will govern it and running without governing body called government. Buletin INTAN indd /10/ :04:04 AM

137 Sharifah Hayati Syed Ismail Role and transition of public services in Malaysia: An effective governance perspective. African Journal of Business Management, Vol. 5(5). Sirajuddin H. Salleh Government, Business and Civil Society: Collaboration towards A Common Destiny. INTAN Executive Series Vol. 4, No. 1. United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). What is Good Governance. Buletin INTAN indd /10/ :04:04 AM

138 NATIONAL DEVELOPMENT PLANNING IN MALAYSIA: A FREE HAND OR A STRONG ARM? Dr. Maziah Che Yusoff Senior Research Fellow Cluster of Development and Policy Research INTAN Bukit Kiara Buletin INTAN indd /10/ :04:04 AM

139 Buletin INTAN indd /10/ :04:04 AM

140 NATIONAL DEVELOPMENT PLANNING IN MALAYSIA: A FREE HAND OR A STRONG ARM? INTRODUCTION National Development Planning is a dominant policy instrument for most developing countries including Malaysia. Malaysia in fact has a long history of using national development plans to great effect, accelerating both the economic growth and the social development of the country. Back in the 1960s, the early plans were focused on the modernisation of traditional sectors like agriculture and mining. In the 1970s and 80s, poverty alleviation and income distribution became the issues of the day, with emphasis shifting to the development of large scale infrastructure projects like the North South Highway and the Penang Bridge. The 1990s were all about boosting industrial and manufacturing capacity and capability. Since 2000, Malaysia has been relentless in focusing on knowledge management, human capital development and ICT. This approach of using national development plans has withstood the test of time and has been proven successful in charting impressive economic growth and development for the country. 139 THE RELEVANCY OF NATIONAL DEVELOPMENT PLANNING: MALAYSIA NEEDS TO SHIFT GEARS However, as the country progresses and charts its way towards becoming a highincome and developed nation by 2020, national development planning is deemed to be outmoded and should be abandoned as it is no longer being practised by most advanced countries. There is a growing notion that government direct intervention should be kept to the minimum and a developed economy should be freely left to market forces. Many have argued that the success of past experiences should not be the basis for future action and a fresh approach is, therefore, needed for Malaysia to face the challenges and uncertainties of the current global scenarios. This argument is based on the fact that the global outlook is so dynamic making any medium or long term plans such as 10th Malaysia Plan, and New Economic Model, no longer relevant. Malaysia has lost its growth Buletin INTAN indd /10/ :04:04 AM

141 Buletin INTAN Jilid 37, Bil. 1/2013 momentum since the Asian Financial Crisis in 1997/1998. There are fears that Malaysia will be stuck in the vicious cycle of being a middle income country, unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain for knowledge and innovation based products and services. While Malaysia was among the highest growing nation during the , average growth has only been 5.0% per annum after the Asian Financial Crisis. This has become a challenge for Malaysia in pushing for potential growth beyond 6%. The question is how Malaysia can gain back its growth momentum. 140 There are suggestions that Malaysia needs fundamentally new economic transformation strategies to forge forward. Thus, policymakers need to shift gears and to make necessary adjustments in addressing the downside risks posed by global uncertainties. For Malaysia to be globally competitive, the market should be agile enough for the private sectors to respond to the changing environment. Some people are of the view that for the flexible market to exists, the government should stay out of the market. Market forces should direct the country s resources into businesses in which Malaysia has clear comparative advantages. It is within this context that the relevancy of the national development plan is debated. STATES VERSUS MARKETS It was customary to regard the absence of government control as being the key feature in distinguishing a capitalist economy from a state-controlled economy. But this equates a competitive market to a monopolistic market. What if government policy is necessary in order to establish a competitive market? The debate can be envisaged in terms of more-or-less rather than either-or. The rapid recovery in China provided evidence on the role of state enterprises in initiating a revival of growth. For Malaysia, the last four decades of growth with quality is the result of sound economic policies. Those successes might not be realised if the country allows for a complete free rein of the market. Malaysia adopts a mixed system approach in her development plans whereby the government sets directions and private enterprises are free to operate. This mixed system is known as the Anglo-Saxon model. The Anglo-Saxon model characterised many of the economies of the European Union and that of the US. Buletin INTAN indd /10/ :04:04 AM

142 National Development Planning in Malaysia: A Free Hand or a Strong Arm? The mixed system is an intermediate system between two extremes - centralised planning and laissez faire. The centralised planning of the socialist system exists in socialist countries such as Cuba and South Korea. The socialist system requires the state to plan and execute in detail its socio-economic programmes and activities. At the other extreme, the laissez faire or the free enterprise, advocates the non-involvement of the state in business and the economy. Between these two extremes, the mixed system calls for the state to have a role in setting the economic direction and facilitating, through loose regulation, the economic growth of the country. This approach in the Malaysian development planning process provides clear direction with flexible strategies as well as forming the basis for strategic collaboration between the government and private sector. The Malaysian development path is to have growth with quality. Desire for wealth should not override other moral obligations. These are the unique features of the Malaysian development plans that have served well in the past and should continue to be the thrust for the future. These unique features are discussed in the following paragraphs. THE DEVELOPMENT PLAN PROVIDES CLEAR VISIONS OF THE FUTURE 141 For the past 50 years, Malaysia has practised development planning model that provides clear visions of the future and identifies long and medium term strategies to achieve multiple outcomes. This experience has meant that the government has been patient and committed in carrying out development plans over five or more years. Organising and analysing diverse mixture of data in the planning process helps bring clarity to possible future events. The point is of course not to predict the future, but to be better prepared for potential developments and to deal with new type of challenges. Economic planning assesses the current state of the economy; designs various types of initiatives to break barriers or bottlenecks in important sectors of the economy; and provides improvement on the coordination between different parts of the economy. Having a plan provides greater focus on the whole of government. Developing a long term vision and applying consistent policies over several years will help achieve sustainable development results. A development plan is a guide for the nation s sustainable growth. It provides clear and flexible policies, strategies and programmes. The ideal Malaysian economic Buletin INTAN indd /10/ :04:04 AM

143 Buletin INTAN Jilid 37, Bil. 1/2013 development plan is very simple. There are no miracles in economic plans. The nation s progress is the result of sound economic plans. Henry Kissinger once said: if you don t know where you are going, every road will get you nowhere. The planning process tests the ability to acknowledge the prospect and work through possible consequences. Without it, there would be a lack of shock absorbers when we hit bumps in the road. The development plan also seeks to achieve consistency among different economic objectives. Some desirable economic goals are likely to conflict with others. It may be possible to stimulate the economy for higher levels of output and employment. But in doing so, the measures applied may also produce rising prices leading to rising imports and falling exports. The result may lead to a balance of payment crisis. Having a plan provides greater focus on the whole of government. Developing a long term vision will help to achieve sustainable development results and promote economic self-reliance in avoiding sole dependence on the foreign sectors. 142 THE SUCCESS STORY IN THE PAST FOUR DECADES ( ) With the comprehensive development planning in place, real gross domestic product (GDP) has grown by an average of 6.3 per cent per annum during 1970 to 2012, higher than the average growth of advanced nations. In fact, Malaysia was one of the fastest growing nations during the period of , where the economy recorded more than 9% growth. Gross National Income (GNI) per capita in current prices grew 25 times from USD 376 in 1970 to USD 9,610 in The Malaysian economy has undergone tremendous transformation from a low income to an upper middle income economy. Unemployment was reduced to 2.9% in 2012 from 7.4% in All this was achieved with low rates of inflation which ranged from 1.7% to 1.6%. These remarkable successes had translated into substantial improvements in the people s quality of life. The people enjoy superior standards of health and education. They lived longer with the average life span of males and females being 72 and 77 years respectively. Poverty has declined to below 2 per cent. Over 95 per cent of households enjoy electricity and have piped water. Within the same period, the economy has grown from US$19.0 billion to US$242 billion. The structure of the Malaysian economy has Buletin INTAN indd /10/ :04:04 AM

144 National Development Planning in Malaysia: A Free Hand or a Strong Arm? changed from being an agricultural-based to an industrial and services-based economy. The share of the manufacturing sector to GDP has increased from 11% in 1970 to 25% in The services sector has become the major source of growth contributing 55% to GDP. Major services subsectors are the wholesale and retail trade, accommodation and restaurants; the finance and insurance; and the transport, storage and communications. The agriculture sector continues to be the major contributor to the economy but has undergone transformation in its value chain. Therefore, as a result of increasing value-add of agriculture products, its contribution as a primary sector declined from 27% in 1970 to 7% in Nowadays, agricultural products have become an input to the resource-based manufacturing sector. From being an exporter of primary products such as rubber, tin, and palm oil, in the 1970s, Malaysia has become a diversified economy. The nation has made very impressive gains, not only in terms of economic restructuring, but also in poverty eradication and liberalisation of the services sector. In 1970, almost half of the population was poor. The mean household income in 1970 was only RM264 per month, with 27% of households earning below RM100 per month and a further 31% earning between RM100 to RM200 per month. By 1990, the incidence of poverty declined to 16.5%. By 2010, hard-core poverty was virtually eradicated. By 2012, the average monthly income for all households has increased to RM5,000. The success story of poverty eradication programmes is evident from the sharp decline in poverty rate from 49.3% in 1970 to only 1.7% in 2012; urban poverty from 21.3% (1970) to 1.0% (2012); rural poverty from 58.7% (1970) to 3.4% (2012). What brought about these remarkable changes? This progress is the result of sound economic plans, coupled with national unity, political and economic stability. None of those would have been realised if the country has allowed for a complete free rein of the market. 143 Today, the challenge has shifted from absolute poverty to low income households the bottom 40% households (B40%). Poverty is no longer a rural phenomenon. Migration to urban areas and significant development of rural areas has contributed to the increasing numbers of urban vulnerable households. Buletin INTAN indd /10/ :04:04 AM

145 Buletin INTAN Jilid 37, Bil. 1/2013 THE NATION S ASPIRATION: GROWTH WITH QUALITY Malaysia has envisioned its aspiration to be a developed country in its own mould by It means, Malaysia will not only be a high income and developed nation but will also encompass a united society with strong moral and ethical values. The nation s aspiration of growth with quality is well reflected under the principles of 1Malaysia: People First, Performance Now, whereby strategies and approaches to drive Malaysia into becoming developed nation will not compromise on the people s well-being. The 2012 budget formulated with the theme National Transformation Policy: Welfare for the People and Well-Being for the Nation has further reinforced this spirit. 144 Learning the lessons of her own development experience, Malaysia fought hard to ensure an emphasis on sharing the benefits of growth, reducing inequalities and transforming economies to help lift their people out of poverty. These were delivered with critical focus on the foundations of human development health, education, nutrition and water. It is within this context that the national development plan accorded equal emphasis on social justice. While restructuring the economy is necessary for the nation to progress and achieve high income growth, social justice is essential to ensure that every Malaysian would be able to participate in the nation s development. Past experience has provided hard evidence that some sort of government interventions are very much needed for Malaysia to forge ahead without compromising on social justice and the quality of life of the rakyat. It is a conventional wisdom that higher economy growth leads to a better quality of life. But, in reality higher income does not always improve quality of life. Even though people with more income have higher purchasing power, it does not guarantee them greater well-being and a happier life. Happiness and well-being do not just come from wealth creation but also from non-material factors. The development of the country should not neglect the provision of quality services such as education, healthcare, housing, environment, communication, public safety, transportation as well as leisure and culture. As such, the government is expected to not only look after the people s well-being of today and future generations, but also the conditions that allow us to live in Buletin INTAN indd /10/ :04:04 AM

146 National Development Planning in Malaysia: A Free Hand or a Strong Arm? peace. Governments today are often asked to fix wages, eradicate poverty, settle disputes, ensure equitable income distribution, care for the sick and the elderly, enhance trade balance, provide support to vulnerable groups and the list goes on and on. Again, none of those would be realised if the country allows for complete free rein of the market. Market forces rely on the assumption that economic agents are motivated only to optimise the satisfaction of their preferences on the basis of rational choice. In reality, this is not so as they are also influenced by sentiment, greed and unrealistic expectations. Malaysia s development thrust lies on the belief that economic growth is not an end in itself but a means to prosperity and a better quality of life. Striving for better quality of life means, in addition to what has been listed above, ensuring people s access to affordable housing, quality education and healthcare. It is the nation s aspiration to be a developed and high income country with a united society. For multiracial countries such as Malaysia, the need to achieve social harmony requires an inclusion policy to provide social justice by removing economic inequalities and to balance the needs of even the smallest minority groups. 145 From 1970 onwards, quality with growth has been the underlying focus for development plans. In 1970, the introduction of the New Economic Policy had set Malaysia on a path of new economic progress. In 1991, Malaysians were given an audacious plan under the title of Vision For the majority of Malaysians it was a pipe dream, but to the nation s leaders it was a lighthouse to move forward to be in the league of developed countries. In 2010, the New Economic Model, the Government Transformation Program and the Economic Transformation Program, and the 10th Malaysian Plan were all components integrated into a plan to steer our nation s progress along the relatively short period towards Vision In ensuring that growth translated into better quality of life of the people, the Malaysian Quality of Life Index (MQLI) was measured on an annual basis using 20-years of time series data. The findings show that Malaysians over the years have enjoyed a better quality of life. Buletin INTAN indd /10/ :04:04 AM

147 Buletin INTAN Jilid 37, Bil. 1/2013 DEVELOPMENT PLANNING PROCESS WITH STRATEGIC COLLABORATION Development planning process involves consultation with the private sectors and various stakeholders. Different from command economy model, Malaysian development plans are indicative, not directive, in nature. Indicative development plans provide roadmap for the country s transformation, state general guidelines and highlight government goals for the national economy. Those are general indicators, not prescriptive. State-owned enterprises are subject to market forces. The development efforts are premised on a pro-business strategy. The development plan redefines the role of government to facilitate the private sector to be the engine of growth. It adopts market oriented policies to encourage private sector investment. This collaboration of government and private sector is crucial for the nation s progress. 146 The experience of yesteryears shows the need for long term policy planning to ensure that we rise to the challenges and maximise the opportunities facing us. The market economy, left unattended, can be vicious without the existence of complementary institutions which represent our collective values. Having long term plans give us the opportunity to leverage on diversity, to integrate with the global world and to build bridges and effective partnerships. National institutions and history matter to economic performance. There is no such thing as a universal template such as the free market forces for economic growth. The rise of state capitalism or the visible hand against free market capitalism or invisible hand as the emerging world s new model has gained much popularity recently and serves as a testimony that economic development planning remains relevant today. CHALLENGES IN MOVING FORWARD: MALAYSIA NEEDS A NEW GAME CHANGER Today, the roadmap to achieve the nation s aspiration is not as easy as when it started in Neither is the way to move forward. Malaysia is at a situation where the economy is already very large and the nation is very much influenced by the world economy. Malaysia can no longer sit on her rural and singularity area. Globalisation has made the world flat. Competition can come from economies as Buletin INTAN indd /10/ :04:04 AM

148 National Development Planning in Malaysia: A Free Hand or a Strong Arm? far away as South America and Eastern Europe. The financial crisis and global economic slowdown has intensified competition for investment and trade. Lacking in creativity and innovation to push for higher productivity, Malaysia is not in a good position to compete with high value-added economies. Malaysia is at a critical juncture in her development path. Malaysia can no longer rely on low cost advantage as in the past, but is also facing intensifying competition from regional economies. The regional economies are fast growing, taking advantage of their scale to leapfrog over their smaller middle income peers. Obviously, the traditional growth engine has slowed down and doing business as usual is not enough. Therefore, it is undeniable that some serious revamps are necessary. However, there is no need to start from scratch as the foundations are all there. Malaysian development plans have served as strong foundations to shift the growth trajectory from a low income to an upper middle income nation for the past four decades. What Malaysia needs is a new game changer to forge the way to the future of Malaysia as a developed nation. Malaysia needs to foster innovation and upgrading in products and processes. Thus, the answer on how Malaysia can gain back its growth momentum is not on the relevancy of the national development plan. It is about the right priorities of the right sectors at the right time. Identifying the right investment, the right catalyst and the right innovation are imperative to complete an equation to accelerate growth. 147 CONCLUSION Moving forward, the thrusts of the nation s development will continue to leverage on the success and strengths that have been built from past initiatives as well as initiating new strategies to ensure sustainable growth. High income is not the end of the development process. The expected outcome of the national development plan is the well-being and quality of life of the rakyat. GDP is a means to achieving better quality of life. Does higher economic growth translate into better quality of life?. Ideally, better quality of life of the rakyat should be the outcome of the GDP growth. But in reality, this is not so. Market forces rely on the assumption that economic agents are motivated only to optimise the satisfaction of their preferences on the basis of rational choice. In reality, they are also influenced Buletin INTAN indd /10/ :04:04 AM

149 Buletin INTAN Jilid 37, Bil. 1/2013 by sentiment, greed and unrealistic expectations. Thus, the nation s aspiration for quality growth might not be realised if the country allows for a complete free rein of the market. For that purpose, the national development plan provides a strong arm for the government to set direction and guidance towards becoming a developed nation; and a free hand for policymakers to have flexible strategies and for the private enterprises to operate. This adopted mixed system in the Malaysian development planning process provides clear direction with flexible strategies as well as forming the basis for strategic collaboration between government and private sector. 148 Buletin INTAN indd /10/ :04:04 AM

150 REFERENCES Bank Negara Malaysia Annual Report Government of Malaysia Second Malaysia Plan, Percetakan National Malaysia Bhd. Kuala Lumpur. Government of Malaysia Sixth Malaysia Plan, Percetakan National Malaysia Bhd. Kuala Lumpur. Government of Malaysia Tenth Malaysia Plan, Percetakan National Malaysia Bhd. Kuala Lumpur. John Antony Xavier and Zafar U. Ahmad Proposed scholarly research agenda for transforming Malaysia into a model developing nation. International Journal of Public Sector Management Vol. 25 No. 3, 2012 pp John Williamson Some Basic Disagreements on Development. A paper presented to the Development Policy Forum on Rethinking Development Policy Packages organised by KDI and the World Bank in Seoul on Oct 15, Malaysian Quality of Life Index Report Buletin INTAN indd /10/ :04:04 AM

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